Pakistan's economy which, was already struggling
for survival, had been hit hard by the Sept 11 events in America
followed by US-led air strikes in Afghanistan.

Consequently, the total loss to the national
economy is now estimated at $2 to 3 billion by the Ministry of
Finance. Earlier the government of Pakistan was maintaining the loss
between $1 to $2 billion. The fall in revenue, decrease in exports and
imports, shrinkage in foreign investment and a slowdown in the local
manufacturing sector altogether causing serious harm to the social and
economic life in Pakistan.

Moreover, increase in freight rates and the
imposition of war-risk insurance will increase the cost of imports and
make Pakistani exports more expensive.

Pakistan's major exports i.e. textile products,
leather and leather products; rice and seafood and other sectors have
suffered a major setback. Although it may be pre-matured to estimate
the total loss, yet the prevailing conditions if continue to persists
the loss of exports is feared much more at the end of the year.

Pakistan's textile sector, which, contributes over
65 per cent of the total exports, has expressed fears to lose over
$700 million at the end of the year due to prevailing conditions. The
persisting recession depressed cotton prices world over bringing it
down considerably. The declining dollar at inter-bank rates is also
compounding the problem of the textile sector. Since September 11, the
dollar has depreciated by more than 5 per cent making it difficult for
the exporters to remain competitive. The textile sector regretted what
they called cancellation and withholding orders by the western buyers.
Most of the buyers were cancelling orders or withholding them because
they think that Pakistan cannot deliver the orders on time due to war
zone conditions declared for Pakistan.

On the other hand rice exporters are also claiming
for a decline of 13.79 per cent in rice exports during the first four
months of the current fiscal.

The value of exported rice has been estimated at
$119.73 million during July-October 2001. It may be recalled that last
year rice exports were estimated 434,358 tons during the same period,
which is estimated at 383,233 tons.

Leather

Leather garments exporters have lost 75 per cent of
the total winter export orders from the US and Europe. Leather garment
exporters to the commerce minister complained this. The exporters have
urged the minister to obtain duty-free concession from EU for leather
garments export on the pattern of textile exports. Due to loss of
export orders production in leather factories had gone down to 25 per
cent

Cancellation of air cargo flights by foreign
airlines is also disrupting the trade flows from Pakistan.
Manufacturing units will have to maintain higher inventories and the
possible departure of expatriates from the country and the suspension
of visits by foreign buyers in view of the media-hype about Pakistan
being in the war zone, will not allow the country to maintain normal
trade relationships. Revenue collection will also suffer due to lower
imports while the continuous influx of Afghan refugees will add
further pressure on Pakistan's limited resources and infrastructure,
the report says.

Under the scenario, exports will decline
significantly, foreign investment flows will dry up, capital flight
will intensify, output losses will be severe and GDP growth will
either be stagnant or negative depending on the intensity, duration
and shape of the campaign in Afghanistan.

The World Bank estimates that growth in developing
countries could be 0.5 or 0.75 per cent points lower than projected.
Applying this to Pakistan's frontline status implies that GDP growth
could be in the range of 2.5 to 3.75 per cent. The target set for GDP
growth in the current fiscal year is 4 per cent.

On the other hand, the positive effects on
Pakistan's fiscal and balance of payment situation will follow with
the lifting of economic sanctions by the US and G-7 countries,
resumption of economic assistance from bilateral governments, debt
relief and better market access to Pakistani exports.

History

For the first time in its history, Pakistan was
able to show a current account surplus in fiscal 2000-01. However,
this did not create easier conditions in the foreign exchange markets,
as the rupee experienced tremendous pressure during the year. But it
clarifies that the surplus was generated by a statistical
artifact-proceeds from the Saudi Oil Facility were categorized as
official transfers and therefore a current account receipt.

The second contributing factor was purchases from
the kerb market (the State Bank bought $2.16 billion from kerb in
2000-01, up from $1.56 billion in 1999-00).

Excluding the impact of changing status of Saudi
Oil Facility (a Saudi commercial loan to finance oil purchases from
the kingdom and the volume of kerb purchases, the current account
deficit fell from $2.641 billion in 1999-00 to $2.509 billion in
2000-01.

Japan

In order to offset huge adverse balance of trade,
Pakistan has sought greater market access from Japan. Besides
inclusion in the list of those countries, which export, rice to Japan.

Besides seeking market access from Japan, Pakistan
has urged the government of Japan to provide technology and technical
know-how for Pakistan's medium and small-scale industries to improve
the productivity and production base and resumption of export credit
and insurance.

The Japanese Minister of Economy, Trade and
Industry Takeo Hiranuma in his meeting with the Pakistani finance
minister said that Japan was willing to extend this facility to
Pakistan for viable projects. He said that Japan would plan to send
experts to Pakistan for helping the small and medium enterprises.

Pakistan has asked Japan to include it in the list
of rice exporting countries, in addition to special quota for Basmati
rice, which is a unique product with aroma and flavour. The commerce
minister also urged the Japan to take steps to increase import of
Pakistani yarn and fabric that has been reduced from 70 per cent to 50
per cent after the relocation of Japanese industry to China.

The Japanese government however has assured to
undertake all possible steps to further boost trade relations and
facilitate Pakistani exporters in the areas of textile, leather, and
fruits and sports goods. Areas like automobile, construction
machinery, software parts; pesticides, cement, textile, chemicals and
railways were identified for investment and trade collaboration
between Pakistan and Japan.

Strategy

The government is working on a 5-pronged strategy
to overcome the difficulties arising out of the present situation.

The first is a sustainable permanent solution like
substantial reduction in Pakistan's obligations. Pakistan owe $12.5
billion debts, the largest claimant being Japan $5.5 billion followed
by USA $3 billion. If we can get reduction in this liability we can
have space in our fiscal policy to manage the situation in a liberal
manner.

Second, increased market access to Pakistan's
products. By January 2002 Pakistan's exports to EU will increase by 30
per cent as compared to the preceding year. Similarly with USA also
Pakistan is chasing the same strategy through the movement of Commerce
Minister and the Finance Minister is following this strategy in Japan.
In order to get positive results, Pakistan is seeking compensation
from EU, USA and Japan.

Thirdly, Pakistan is seeking concessionary softer
loans from international agencies at the rate of zero per cent for 35
years for Poverty Reduction Growth Facility (PRGF). Pakistan will move
a formal request in November.

Meanwhile, the International Monetary Fund (IMF)
has indicated to wrap up negotiations on a new poverty reduction loan
for Pakistan soon. Tom Dawson, IMF spokesman has expressed the hope
that a financing package supporting the authorities program is agreed
soon and that discussion on poverty reduction loan can be wrapped up
in the near future. Good progress is being made on this subject.
However it is premature to speculate on the size of the loan. Earlier
this week the US State Department had said it would support a $2
billion IMF loan for Pakistan. Dawson has suggested that Pakistan was
unlikely to secure that amount of funding from the IMF alone but that
World Bank and other contributions were likely to be added, possibly
taking the broader financing package to an amount of roughly that
size.

Package

White House has recently told lawmakers that it may
seek to cut tariffs on Pakistani products for up to three years as
part of a package to reward Islamabad for helping in the war on
terrorism.

But US textile manufacturers were making last-ditch
efforts to prevent the cuts, saying that they went too far. The trade
benefits, subject to approval, would be part of a broader US aid
package. It is expected to include an additional $500 million in
direct financial assistance, debt rescheduling and Washington's
support for international loans that could be worth billions.

The US administration also told lawmakers it would
submit its package of trade concessions to Congress in the next few
days. The White House is urging lawmakers to act quickly.

Under the draft White House proposal, Congress
would grant Bush the authority to reduce or eliminate tariffs on
certain Pakistani goods through 2004. The administration would also
allow Pakistan to increase this year's shipments of textiles to the US
by using a portion of next year's quota.

US aid

Pakistan was set to receive well over $1 billion in
assistance from US and several billion from international
organizations. This was indicated by the US State Department last
week. This will be an additional package besides the State Department
officials had been talking earlier on the subject during their visit
to Islamabad recently.

The fourth part of this strategy is to claim all
expenditures being incurred on extra security measures taken for
ensuring internal security and security at borders. This is necessary
because Pakistan did not have provision in the present budget to incur
and allow this expenditure.

Fifthly, Pakistan is also seeking coalition
alliance to get considerable share in the rehabilitation of post war
Afghanistan. Pakistan would not like repeating of the situation of
1989 as the countries involved left without re-construction of the
country required out of the then Soviet war. Pakistan is expected to
gain by increased employment, selling products and providing services
for the reconstruction of post-war Afghanistan.

Dr. Ishrat, Governor State Bank of Pakistan has
said that as a result of government efforts to motivate importers of
USA and EU to order from Pakistan, the outcome will be visible soon.
The common man, was going to get relief in the present situation as
benefit of cheaper imports of petroleum products will pass on to him.
Transport and electricity will become cheaper. The important benefit
of appreciated rupee will be reduced debt servicing liabilities.

Oil

Pakistan expects $1 to $1.2 billion saving in its
$3.5 billion annual oil import bill if the prevailing situation
continues, but this will result in massive industrial and economic
downturn and revenue loss.

Secretary Petroleum M. Abdullah Yousaf said at a
news briefing that the government was expecting $500-600 million
saving due to decline in international oil price and another $500-600
million through reduction in consumption.

In another way the healthy decline in import bill
would be around 15 to 20 per cent due to fall in international oil
prices, another about 10 per cent due to reduction in consumption
besides strengthening of the rupee against the US dollar.

If the situation continues as today we expect oil
import bill going down by around $1 billion, the Secretary Petroleum
said. The decline in consumption was because of a combination of
decline in industry and Afghan transit trade.

He said that WAPDA's furnace oil bill had also been
reduced during the last quarter due to availability of more hydel
power but this will increase during the current quarters, although it
was lower than normal in October as well.

Abdullah said that war risk premium imposed on
ships to Pakistan had an additional cost because it was 0.5 per cent
of the total oil import bill and then additional inventories for
strategic reserves carried some additional burden.

The government had deferred the gas price revision
due in September this year to provide relief to the consumers against
post-September11 situation till next bi-annual review becomes due in
March next year.

Currently, the petroleum stocks were satisfactory
as required under the "war book" and were reviewed weekly.
He said that stocks have been build up over the last few days from
existing 10-12 days requirement to about 30 days. The petroleum
secretary said the petroleum ministry was in final stages of
discussion with tribal leaders to lift force majeure imposed on oil
and gas exploration in Balochistan. However, he expressed his
inability to say when the government would be in a position to strike
a deal with tribal leaders.

The government expected a substantial investment in
the country particularly in the oil and gas sector in view of the
changing environment.

Prospects

There was a mix reaction of the business community
over the prevailing economic conditions in Pakistan. There was a
feeling that currently Pakistan is walking on a tight rope, which
calls for extra care to bail out the country and its economy. Some
senior members of the business community feel that Pakistan's economy
is passing through a make or mar situation. So far Pakistan's
leadership has played its cards well. Pakistan could emerge as a
strong economy on the world map if the present management handled the
situation carefully. They said that as a result of current situation,
which has apparently eased the situation for Pakistan due to flow of
foreign aid to the government, however the private sector has suffered
a lot as well as the common man due to stagnant economic conditions.
They said that situation demands that steps should immediately be
taken for the relief of the common man. The international oil prices
have gown down steeply but its benefits to the common man has not been
passed on so far. Contrary to that the electricity charges have been
increased.

Although the State Bank of Pakistan has indicated
that general public would soon get relief in electricity and
transportation, the government has announced however practically
speaking nothing tangible so far. The business community feels that
due to decline in exports, the local industry has suffered a lot and
consequently it is adversely affecting the working class. Since the
government is seeking relief package from the world community, it is
imperative to give some relief package to the people to provide them a
sigh of relief to their sufferings, which continue to increase every
day.